Ripple effects of fraud

Fraud also affects fraudsters' families and friends in concentric circles

November/December 2018

We often focus on a fraud’s perpetrator, the conditions that allowed the fraud, plus the victim business and its owners. In this case, the authors cover the bases but also discuss the forgotten aspect: how the fraud affects so many more who live in the concentric circles around the fraudster.

James Brighton was running a successful trucking business in Monroe, Louisiana, when he was approached by Bob and Larry Hymel, two brothers who owned Zoom Transport, a much larger but similar operation in Lafayette. (All names and places have been changed.) The brothers offered James a job as company president. Promised perks included a low six-figure salary and a company car. And if Brighton met two years of revenue and growth goals, the company would reward him with 5 percent of stock each year with a cap of 25 percent. When Zoom hired Brighton it owned 90 trucks, and had $12.5 million in revenue and 100 shares of outstanding stock.

Mona, Brighton’s wife, was thrilled about his new job. The couple built a $450,000 house and settled into Lafayette society. She decorated the new home with, among other things, high-end antiques (including a $30,000 armoire), five $6,000 couches, two $4,000 dining tables, eight $800 chairs, dozens of $800 lamps, 24 place settings of china and silver, and a $17,000 rug. The yard needed an in-ground $60,000 swimming pool and $40,000 plum trees. She drove around town in her top-of-the-line Mercedes. And Brighton bought a boat for fishing in the Gulf of Mexico to put some occasional distance from his wife and his son, Sean.

Brighton seemed to be a good fit for the Zoom Transport job. In his first year, he hit all the Hymels’ targets. Despite some raised eyebrows, he requested and received a red Corvette as his company car plus a generous raise.

After his second year of meeting and exceeding the Hymels’ goals, he received five shares of company stock per his contract. Five percent of 100 outstanding shares, of course, was five shares. However, immediately after the Hymels gave Brighton his shares, they issued 9,900 more shares to themselves, which made Brighton’s share of the business essentially worthless.

Brighton wasn’t pleased and asked the brothers to rectify the situation by changing his contract terms from “shares” to “percentage ownership interest.” The brothers seemed to be too busy to correct what they termed a “small error” in the contract. But they hadn’t realized they’d created a perfect storm for fraud.

Related Articles

Boards' familiarity of 'bullybezzlers' allowed fraud

Paul Laneuville and Carl Walters are true examples of a phenomenon I call the “bullybezzler.” Both cost their organizations hundreds of thousands of dollars. And the employees they bullied eventually brought them both down.

Using one fraud to hide another

In each of the cases I’ve covered in recent columns, the only fraud involved cooking the books. But in other cases, fraudsters commit financial statement fraud as the secondary act to conceal the primary frauds.

The contempt of families

The embezzlers’ fraud wheelhouse contains a classic tool for “misappropriating funds” from their employers: the ghost employee. Simply put, “The term ghost employee refers to someone on the payroll who does not actually work for the victim company.” (2015 Fraud Examiners Manual, 1.456) Ghost employees are miracles of physics: they might or might not exist and companies don’t employ them, yet they draw regular paychecks.